Cryptocurrency has revolutionized not only the financial space but also the technological and educational space. Taking a closer look at how it interferes with the political world, with more and more governments creating laws and regulations around it, it’s safe to say that this trailblazing concept is here to stay and to gain mainstream popularity. As the best cryptocurrency in terms of market capitalization, Bitcoin enters the financial strategies of more and more institutional and retail investors alike, and grasping the underpinnings of digital currency can help realize what investment opportunities exist or emerge. Even better, such an understanding can help understand logically how technology is evolving.
Just like understanding how the internet works benefits you today, understanding blockchain, crypto, decentralized finance, and other concepts from this sphere might be of use someday. Ready to delve into it?
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Scrapping the surface
A cryptocurrency represents a digital type of currency that relies on cryptography to be secure, and works without needing the involvement of a central authority, like banks, governments, or any financial institutions. It serves as a medium of exchange, allowing crypto owners and users to transfer value anywhere in the world, in an instant, and often without having their identity disclosed. Unlike traditional currencies, cryptos are decentralized and usually developed on a public ledger supporting all transactions, aka blockchain.
What makes crypto unique
Let’s look closer at the main features that differentiate crypto from other traditional financial systems:
Decentralization
One of the most distinguishing features of crypto is that it operates outside the borders of any central authority. On the contrary, conventional banking structures need regulators and central banks for transaction and money management and control. Digital currencies, however, use a peer-to-peer (P2P) network, and the intermediaries that are so needed in the traditional systems are replaced by consensus protocols that guarantee trust and accuracy.
Most cryptos come with a finite supply established by their code. For instance, Bitcoin has a feature determined to prevent inflation and comes with a maximum supply of 21MN Bitcoins. Once this limit is hit, no other coins can be issued.
Intangibility
You can’t touch digital currency – as you can’t touch anything that’s entirely and intrinsically virtual. Cryptos don’t have a tangible form, like banknotes or coins. This might beg the question, “How do you prove you own crypto?”.
Well, crypto ownership is proven through the blockchain ledger, where every entry is logged and accessible to anyone. This doesn’t mean that transfers or ownership proof can be manipulated, as is often the case with traditional financial systems. Cutting-edge encryption and a fusion of cryptographic principles ensure blockchain’s immutable and secure nature.
Blockchain tech
The majority of cryptos need blockchain to work. This is a kind of distributed ledger technology (DLT) in the form of a digital string of blocks, with each one storing an inventory of confirmed transactions. The data that enters the block becomes immutable once it’s added, meaning that no one can modify it without changing all the succeeding blocks.
Such an undertaking would need ridiculously much time, computational power, and skill to succeed. Given the task’s difficulty and the network’s robust consensus rules, getting through is almost impossible.
Cryptographic safekeeping
The term “crypto” is derived from cryptography, the part of mathematics that deals with communication security. All transactions are encoded and need to be confirmed via sophisticated algorithms to prevent fraud and counterfeiting and guarantee the network’s identity.
How crypto operates
The concept of cryptocurrency might seem puzzling, if not intimidating, at first. It’s still in its developmental stages, and most people didn’t hear about crypto until 2007 when Bitcoin skyrocketed to nearly $20K, and the media began reporting on it heavily.
To eliminate the complexity of this concept, it helps to break down the basic operation of cryptocurrency into four elementary steps:
- First, the user sends crypto from one e-wallet (or digital wallet) to another, employing a private key – a cryptographic code that proves ownership and approves the transfer.
- When the transaction begins, it’s shared with all the computers (nodes) inside the crypto network.
- Transactions are verified by the network through a consensus algorithm, such as Bitcoin’s Proof-of-Work (PoW) or Ethereum’s Proof-of-Stake (PoS). PoW requires miners to solve difficult computational problems, which is why it’s very energy-intensive and is criticized for it. On the other hand, PoS selects validators based on their staked holdings, consuming incomparably less energy for this action. Ethereum switched from PoW to PoS with a previously made Merge update.
- After it’s checked, the transaction goes into a block and becomes part of the blockchain. It’s marked with the date and time, which can be seen by anyone but can’t be changed.
Crypto use cases
While it’s common to hear people associating crypto only with speculative investments, their use case sets are actually more varied. Here are some practical applications of crypto:
- Digital payments. Cryptos can buy you services and goods from businesses that take them as payment, especially online. Merchants like Wikipedia, Overstock, Newegg, and even PayPal have greenlit crypto payments in several regions.
- Store of value. Like gold, Bitcoin is often considered able to hedge inflation and serve as a store of value, particularly in countries with unstable currencies like El Salvador.
- Remittances. International value transfers have just gotten easier, rapider, and cheaper thanks to crypto. This blockchain-based technology allows for fast and low-cost international money transfers, sidestepping banks and cutting fees considerably, being especially helpful in underbanked regions.
- Decentralized finance (DeFi). Blockchain-built DeFi platforms such as Ethereum provide services like lending, borrowing, and trading, avoiding any traditional financial intermediary.
- Non-fungible tokens (NFTs). Fans and investors alike can use their crypto to buy and sell NFTs. These are peerless digital assets connected to art, music, gaming, real estate, and more sectors, marking a new era for digital ownership and content creation.
Final considerations
Crypto sticks out as one of the most groundbreaking technological developments of the 21st century. Whether you’re a curious spectator, aspiring investor, or tech fan, understanding how cryptocurrencies work is a great first step into the future of finance.
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